Bankruptcy and Freezing Bank Accounts

In most bankruptcy cases, your checking account does not get frozen unless you have a checking account with the same bank that you owe money to for some debt. However, Wells Fargo had a policy of freezing any person’s bank account who filed for bankruptcy. As part of its standard practice, Wells Fargo would run a computerized comparison all bankruptcy cases filed in the United States against its list of account holders. If there was a hit, the account was frozen even if Wells Fargo was not a creditor of the debtor. As you can guess, this bank got sued for this bad policy in the bankruptcy case of In Re Mwangi.

After freezing the bank account in Mwangi, Wells Fargo sent a letter to the Chapter 7 trustee asking for instructions. The trustee chose not to respond to this letter. The debtors’ bankruptcy attorney demanded that the funds be released to them but bank refused. What did Wells Fargo gain by freezing the account? The answer is absolutely nothing. There is no law that required Wells Fargo to take this action.

In response to the freezing of his bank account, Mr. Mwangi’s bankruptcy attorney filed a motion seeking sanctions against Wells Fargo for violating the automatic stay pursuant to sections 362 (a) (3) and (6). The bankruptcy court ruled in favor of Wells Fargo stating that the bank did not violate the automatic stay because it did not attempt to “assess, collect, or recover” any pre-petition claim it had against the Mwangis. In response, the debtors appealed.

The Ninth Circuit Appeals court ruled that the bank exercised control over property of the estate. The court stated, “Wells Fargo could have paid the accounts to the trustee; it did not. Wells Fargo could have released the account funds claimed as exempt to the Appellant when demand was made; it did not. Instead, it chose to hold the funds until a demand was made for the payment that it alone deemed appropriate. If that is not ‘exercising control over’ the funds, we don’t know what is.”

The appeals court sent the case back down to the bankruptcy court for a determine as to whether the automatic stay was violated. I think it was a clear violation. It will be interesting to see how this case turns out.

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